Emeco Holdings buys earth moving equipment and leases it to businesses in the mining sector: iron ore, gold, coal, and copper in Australia, Chile, Canada and Indonesia. The company was founded in 1972 and, after a period when it was owned by a private equity firm, was floated on the ASX in 2005.
The business model should be familiar by now: like Silver Chef, Northbridge, and Northgate, the name of the game is specialization, risk spreading, niche market domination, and balance sheet flexibility.
Like Northgate, it over-depreciates. See here:
Or here, in figures provided by the company itself for the period 2009-2012:
Maintenance capex is therefore about 47% to 48% of depreciation. Knowing this allows us to build an accurate economic picture of the company:
So Emeco is worth AUD $1.43 per share (if we use the average operating profit over the last business cycle), or AUD $2.48 per share (if we use the average return on net operating assets and apply it to Emeco’s current installed capacity). The stock is trading at $0.47 – i.e. at either 1/3rd or 1/5th of its intrinsic value.
It is free cash flow positive and there are no covenant or liquidity issues. Hell, at $0.48, it is trading below liquidation value.
If you can break Emeco, hats off. I can’t.
Disclosure: No position.